General Electric: So Long Synchrony Financial, Here Comes the Cash

Citigroup’s Donald Fandetti and team think the Fed’s approval of the final spin of Synchrony Financial (SYF) by General Electric (GE) will remove an overhang for the former’s stock:

Associated Press

After the market close, Synchrony received approval from the Fed to separate from GE (GE owns ~85% of the shares). This will enable Synchrony to split-off from GE and then implement a capital return at some point (dividend + buyback). Both Synchrony and GE are set to report earnings on Fri, Oct 16. We would expect GE/Synchrony to launch an “exchange offer” via an S-4 filing after/around the earnings release Friday. The timing of this approval is good as the 30-day exchange offer marketing period won’t conflict with a GE earnings blackout period (which would kick in Dec 15th and last until Q4 earnings Jan 15th). A key outstanding question is if Synchrony will be required to go through the formal CCAR process along with the large banks (the higher probability scenario). If they are included in CCAR, then Synchrony’s capital return approval would come in June ’16. However, if they are not part of CCAR (the lower probability) then Synchrony could implement a capital return right after the exchange offer. We would expect color on these capital questions to be addressed during the earnings call and in the S-4…

As stated previously, we’d expect some technical pressure on Synchrony shares from the exchange but would use the opportunity to build positions as 1) capital return boosts the earnings growth rate, 2) fundamentals are healthy for the company and 3) they should be added to the S&P500 upon completion of the exchange. We also view the recent renewal of the PayPal (PYPL) partnership as a positive and it follows our Q3 earnings preview where we highlighted the likelihood of a renewal.

Shares of Synchrony Financial have dipped 0.2% to $ 31.46 at 11:03 a.m. today, while General Electric has gained 1.5% to $ 28, and PayPal has risen 1.3% to $ 34.51.


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